AQA A-level Economics: Poverty and government policies on poverty and redistribution (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover The problem of poverty (3.1.7.2) and Government policies to alleviate poverty and to influence the distribution of income and wealth (3.1.7.3) in the AQA AS and A-level Economics specification (version 1.3), first taught from September 2015. The combined PDF prints them as 4.1.7.2 and 4.1.7.3. All countries, regions and figures are invented.

Links: the study guide, the revision notes, the AQA A-level Economics hub, the printable checklist and the free 10-minute diagnostics.

Questions

1. Distinguish between absolute poverty and relative poverty. [4]

2. Country E has six households with monthly incomes of 700, 1,100, 1,700, 2,300, 2,900 and 4,400.

(a) Calculate the median income and the relative poverty line set at 60% of the median. [2] (b) State the percentage of households in relative poverty. [1] (c) All incomes rise 25% and prices are unchanged. Using an absolute line of 1,300, show what happens to each measure. [3]

3. Explain two causes of poverty. [4]

4. Explain three ways in which poverty may impose costs on an economy. [6]

5. A household’s monthly net income is 0.85 x earnings plus any benefit. The benefit is 600 at zero earnings and falls by 0.60 for each unit earned, until it reaches zero.

(a) Calculate net income at earnings of 0, 500 and 1,000. [2] (b) Calculate the effective marginal tax rate between earnings of 0 and 500. [2] (c) Explain one effect on the household’s incentives. [2]

6. Income is taxed at 0% up to 1,500, 25% from 1,500 to 5,000 and 45% above 5,000.

(a) Calculate the tax on monthly incomes of 3,000 and 9,000. [2] (b) Calculate each average tax rate. [1] (c) Explain, using the net incomes, why the tax is redistributive. [2]

7. Region F has 50,000 households, of which 8,000 are poor. Option 1 pays 2,500 to each poor household that claims. Take-up is 75% and administration costs 12% of payments. Option 2 pays 400 to every household.

(a) Calculate the total cost of option 1. [3] (b) Calculate the cost of option 2 and the percentage reaching poor households. [2] (c) State one drawback of means-testing. [1]

8. In a labour market, demand is L = 840 - 30W and supply is L = 40W, with L in hundreds of hours and W the hourly wage.

(a) Find the equilibrium wage and employment, then the effect of a minimum wage of 14. [3] (b) Calculate the total wage bill before and after. [2] (c) Explain why the wage bill changes as it does. [1]

9. Explain how a minimum wage could raise employment where one employer dominates the local labour market. [4]

10. Evaluate the case for paying higher benefits to the poorest households financed by a higher top rate of income tax. [9]

11. Evaluate the view that investment in education and training is a more effective way of reducing poverty than cash transfers. [12]

Answers

1. Absolute poverty is income below the fixed level needed for basic necessities such as food, shelter and clothing [1], a standard that stays the same in real terms [1]. Relative poverty is income below a set share (often 60%) of the median in the same society [1], so it changes when typical incomes change [1]. [4] Examiner insight: Answers tend to gain more when each definition names its yardstick (a fixed basket or a share of the median) than when they only say “very poor” and “poorer than others”.

2. (a) Median = (1,700 + 2,300) / 2 = 2,000 [1]; line = 0.6 x 2,000 = 1,200 [1]. (b) Incomes of 700 and 1,100 are below 1,200: 2 of 6 = 33.3% [1]. (c) New incomes: 875, 1,375, 2,125, 2,875, 3,625, 5,500. Median = 2,500, line = 1,500; 875 and 1,375 are below it, so relative poverty is still 33.3% [1]. Absolute line 1,300: before, 700 and 1,100 were below (33.3%) [1]; after, only 875 is below (16.7%) [1]. [6] Examiner insight: Recompute the median after the change instead of reusing the old line; reusing it is a common reason for reaching the wrong conclusion on relative poverty.

3. Unemployment: with no wage income, households rely on benefits that are often below the poverty line [1], so income is low [1]. Low skills: low productivity means a low marginal revenue product and low wages [1], so even full-time work may leave a household below the line [1]. (Other valid causes include ill-health, discrimination and structural change.) [4] Examiner insight: A cause earns more when it is followed by a link to low income. A bare list of causes is usually less persuasive.

4. Lower human capital: poor health and weaker education reduce productivity [1], which lowers long-run aggregate supply [1]. Higher public spending: more welfare and health spending [1] carries an opportunity cost for other spending or higher taxes [1]. Wasted talent: low social mobility leaves able people under-used [1], so output is below potential [1]. [6] Examiner insight: Three developed points usually serve better than five one-line points. Each effect needs a consequence for the economy, not just for the household.

5. (a) At 0: 600 [1]. At 500: 0.85 x 500 + (600 - 300) = 425 + 300 = 725. At 1,000: 850 + 0 = 850 [1]. (b) Gain = 725 - 600 = 125 for 500 of earnings, so the household keeps 25% [1]; the effective marginal tax rate is 75% (15% tax + 60% withdrawal) [1]. (c) Working more brings only 25p per extra unit [1], so the household may choose fewer hours or no work (poverty or unemployment trap), especially after travel or childcare costs [1]. [6] Examiner insight: Show the benefit withdrawal as part of the marginal tax rate. Analysis of incentives that ignores withdrawal tends to read as incomplete.

6. (a) Tax on 3,000 = 25% x 1,500 = 375 [1]. Tax on 9,000 = 25% x 3,500 + 45% x 4,000 = 875 + 1,800 = 2,675 [1]. (b) 375 / 3,000 = 12.5%; 2,675 / 9,000 = 29.7% [1]. (c) Tax takes a larger percentage as income rises (12.5% then 29.7%), so it is progressive [1]. Net incomes are 2,625 and 6,325, a ratio of 2.41 against 3.0 before tax, so the gap narrows [1]. [5] Examiner insight: “Progressive” is about the percentage of income taken. Quoting both average rates makes the point clearly.

7. (a) Claimants = 0.75 x 8,000 = 6,000 [1]; payments = 6,000 x 2,500 = 15.0m [1]; administration = 0.12 x 15.0m = 1.8m, so total = 16.8m [1]. (b) Cost = 50,000 x 400 = 20.0m [1]. Poor households receive 8,000 x 400 = 3.2m, which is 16% [1]. (c) Non-take-up leaves some poor households without help (or stigma, or a poverty trap) [1]. [6] Examiner insight: State the cost of each option on the same basis before comparing. Evaluation is stronger when you note that option 1 misses some poor households.

8. (a) Equilibrium: 840 - 30W = 40W, so W = 12 and L = 480 [1]. At 14: demand = 420 and supply = 560 [1]; employment falls by 60 and unemployment is 140 [1]. (b) Before: 12 x 480 = 5,760. After: 14 x 420 = 5,880 [1] [1]. (c) Demand is inelastic over the range: employment falls 12.5% while the wage rises 16.7%, an elasticity of about -0.75 [1]. [6] Examiner insight: Giving employment and the wage bill together lets you show that jobs fall while the pay of those in work rises. Both effects belong in an evaluation.

9. A monopsonist faces an upward-sloping supply curve, so hiring one more worker raises the wage paid to all [1]. Its marginal cost of labour lies above the wage [1], so it hires where marginal cost equals marginal revenue product, paying a wage below that product and employing fewer workers than a competitive market [1]. A legal floor above the current wage, yet no higher than the competitive wage, makes each extra hire cost only the floor wage, so the firm keeps hiring until marginal revenue product falls to that floor [1]. [4] Examiner insight: The result depends on the level of the minimum relative to the competitive wage. Say where it would stop working.

10. Higher benefits raise the incomes of the poorest, cutting absolute and relative poverty directly [1]. Poorer households spend most extra income, so demand rises [1]. A higher top rate narrows post-tax gaps because it is progressive [1]. A utilitarian argument says the loss to high earners is smaller than the gain to the poor, though this is a value judgement [1]. Against this, very high marginal rates may reduce effort, enterprise or encourage avoidance and emigration [1], so revenue may fall short of forecasts, depending on how responsive taxpayers are [1]. Higher benefits may deepen the poverty trap if they are withdrawn as earnings rise [1]. A libertarian or market-based view puts property rights and growth first and prefers incentives [1]. Judgement: the policy is more convincing for short-run relative poverty if the top rate is not near the point where revenue falls, and best combined with training [1]. [9] Examiner insight: A short paragraph that separates positive claims from value judgements often adds the evaluation marks. End by tying your judgement to the objective.

11. Education and training raise productivity [1], and higher productivity raises wages and household income [1]. They tackle a cause instead of the symptom, reducing future benefit costs [1] and raising long-run aggregate supply [1]. They can break the cycle of deprivation between generations [1]. However, the effect takes years, whereas poor households need income now and transfers act immediately [1] [1]. Some groups, such as people with disabilities, the elderly and some lone parents, cannot be helped mainly through skills [1]. Transfers carry incentive and fiscal costs [1], while training may be of poor quality or mismatched to the jobs available [1]. Judgement: the policies are complements. Cash transfers suit short-run absolute poverty and groups outside the labour market, training suits long-run and working-age poverty [1], and the choice rests on the time horizon and on how much weight society gives to equality and responsibility [1]. [12] Examiner insight: Strong answers weigh the time horizon and the group affected. Concluding for one policy without conditions is usually less convincing.

Where marks are usually lost

• Using the mean instead of the median when finding a relative line.
• Reusing the old poverty line after incomes change.
• Saying growth must cut relative poverty.
• Describing a tax as progressive because the amount paid rises, not the percentage.
• Leaving out benefit withdrawal when discussing incentives.
• Comparing policy costs on different bases.
• Writing a list of causes or policies with no chain of reasoning to income.
• Presenting one-sided policy answers with no cost, time lag or incentive effect.
• Stating a political view without showing the economic mechanism.

Next steps

• Revisit the study guide for any question you lost marks on.
• Condense with the revision notes.
• Check coverage on the printable checklist and the AQA A-level Economics hub.
• Try the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

The AQA AS and A-level Economics specification (7135 and 7136), version 1.3, 29 June 2022, published by AQA, first taught from September 2015.